Enhance profitability and remain a cost competitive bank through efficient Procurement Solution
Global market conditions for banks & financial services (BFS) firms could not be more demanding. But if the challenges are numerous, so are the opportunities for procurement and supply management teams to affect business performance in positive ways. Before we get into deeper insights such as the benefits, market players etc…, let’s get a basic understanding such as meaning of procurement and processes involved.
This Part1 will throw light on why does a bank need Procurement Solution!
Let’s get the basics right
The objective of a Procurement function in an organization is to assist in purchasing / procuring materials and services required by other functions. Its goal is to obtain the right product or service, at the right place, at the right time, at the right price in the most efficient manner possible. And, achievement of this goal will result in saving of time, money and value for the organization and improving margins and bottom line.
In a typical procurement process there could be several steps involved and the length of this cycle is influenced by the banks policies. Let’s get an understanding of the steps involved in a centralized procurement manual process in a bank. It generally starts with the identification of requirements, through generation of purchase requisition by different branches such as requesting for stationary, laptops, chairs, etc… to the procurement department. These requirements are consolidated and the purchase function sends a request for quotation to different suppliers. On receipt of Quotations from suppliers, through price comparison and other factors such as past performance, quality delivered, payment terms etc…, a supplier is selected. Purchase orders (PO) are then raised, providing details of the items required. Once the goods are received, bank acknowledges it and raises good receipt post inspection of the goods. If the goods are not as per requirements, then they are sent back to the supplier. Supplier issues an Invoice and the PO quantity and value (in some cases GR also) are reconciled and if everything is fine then payment is made to the supplier by the Finance department.
However, banks face particular organizational and capability challenges in delivering systematic savings in external spend, compared to companies in sectors such as manufacturing, transportation or retail. The main drivers behind this are the presence of decentralized structures and unclear governance issues caused by mergers and acquisitions within the industry. Another driver is the under investment in procurement expertise due to historically higher margins in the sector, and the corresponding lack of urgency.
Why does the bank need it???
Procurement process when done manually is highly laborious, ineffective and inefficient. It involves a lot of resources, time and effort but still can end up being disorganized. It is extremely challenging for a procurement function to fulfill its objectives. Hence, the need of a Procurement Solution or e-Procurement has arisen.
A Procurement solution helps banks replicate the entire manual procurement process and make the procurement paperless, effortless, transparent & economical. e-Procurement is nothing but electronically implementing the procurement cycle, an e-banking initiative which the banks these days seems to prefer.
Just to get more clarity, e-Procurement has many different definitions in the marketplace, and is still confused with EIPP (electronic invoice presentation and payment), P2P (procure to pay), and e-payment (electronic payment), but none of these technologies comes close to implementing the full procurement cycle.
It’s really mind boggling! How can a procurement solution control costs and risks when banks are busy juggling different new products schemes related to lending & deposits, struggling to add value to its customer relationships and making efforts to make profits? Well the answer is:
- Having such a solution ensures that there is a continuous business with suppliers which result in better & improved long term relationship with them. Over a period, it will fetch the benefit of extra discounts, favorable payment terms and improved delivery schedules. Also, it helps you identify your star supplie
- When a bank centralizes it sourcing and spend management, it gets greater visibility and cost savings
- It enhances the productivity with standardized processes, best practices, and shorter cycle times
- The solution automates governance and compliance, enforcing contract terms, sustainability requirements, and more
- Instead of awkward manual negotiation processes, banks can make Suppliers compete against each other and see the price fall sharply; Purchase Managers across world just love it!
- Negotiated savings reaching the bottom line
- Time to engage in more strategic activities, as data doesn’t need to be re-entered in multiple systems, overcharges are automatically detected, thus procurement team is able to spend their time dealing with problems, performing analysis, and ensuring that rebates are received and "best price" agreements are adhered to.
- All processes go through the system hence unscrupulous employees don’t get the chance to charge personal expenses to company accounts, hence reducing Fraud occurrence.
- Budgetary constraints can be taken into account when constructing rules and work-flows, and purchases that are beyond approval limits can be flagged and forced into an authorization queue.
- Hence, improved efficiency
Spend Management provides a holistic view of activities in the procurement process. Its prime motive is to manage the spending in the best possible manner. It creates long term and sustainable savings; hence it’s very important that companies focus on procurement as a strategic area.
In my next article (Part2) , you will learn the procurement landscape in India and few recommendations as well.